Victor Gutwein, an investor and managing partner at M25, shares insightful stories and authentic examples of how startups evolve in the Midwest. He also reflects on opportunities for both founders and investors as the startup ecosystem there develops.
Victor Gutwein, an investor and Managing Partner at M25, shares insightful stories and authentic examples of how startups evolve in the Midwest. He also reflects on opportunities for both founders and investors as the startup ecosystem there develops.
In this episode, you'll learn:
[6:56] Why is it challenging for founders in the Midwest to find real risk-seeking capital?
[11:44] How does a conservative mindset influence founders to sacrifice hypergrowth for modest profits?
[16:23] Midwest startups should capitalize on the natural advantage of being closer to customers than coastal startups.
[25:02] Why is managing cultural pressure becoming more important to founders?
Non-profit that Victor is passionate about: FAITHTECH
Victor Gutwein is an investor and Managing Partner at M25. He’s an entrepreneur, economist, and strategist aiming to create value in the Midwest by investing in early-stage startups. Victor grew up in Northwestern Indiana before moving to Chicago to study economics at the University of Chicago. He has worked in corporate retail fashion and e-commerce and also has entrepreneurial experience building a vending machine business, kick scooter company and the board of UChicago’s first student-run venture fund.
M25 is a Chicago-based early-stage venture capital firm investing solely in companies headquartered in the Midwest. Their portfolio companies include Authentic, Joshin Care, Branch, Upsie, and Qooper.
Next Week's Episode
In next week’s episode, we have a special guest, Nick Moran, Founder and General Partner at New Stack Ventures, where we chat about what he looks for in founders and why it’s different from what Silicon Valley VCs search.
Subscribe to our podcast and stay tuned for our next episode that will drop next Tuesday.
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Victor Gutwein: I have companies that consistently exceed their forecast. Like who exceeds hockey stick level forecast? Well, the problem is a lot of our founders aren't putting hockey sticks out there, they're putting like, “Oh, I know we're going to close these deals and this deal,” that's all they put.
Gopi Rangan: You are listening to the Sure Shot Entrepreneur. A podcast for founders with ambitious ideas, venture capital investors, and other early believers tell you relatable, insightful, and authentic stories to help you realize your vision.
Welcome to the Sure Shot Entrepreneur, my guest today is Victor Gutwein. He's a venture capital investor managing partner at M 25. He grew up in northwestern Indiana and went to college at the University of Chicago. He primarily invests in the Midwest. Let's learn from him what kind of startups he's looking for and how he evaluates opportunities.
Victor, welcome to the Sure Shot Entrepreneur.
Victor Gutwein: Thanks for having me Gopi, excited to be here.
Gopi Rangan: Tell me about yourself. Starting with college, you went to the University of Chicago and from there, a quick story on how you got to M 25.
Victor Gutwein: Of course, the University of Chicago was a great place to be. As a young tinkering entrepreneur, I launched my first startup as a freshman, which was a scooter startup. And this was before all of the scooter startups like Bird and Lime that we know nowadays. We had some of those same ideas, but we didn't get super far, and ultimately it was a failed startup.
But what it did was it got me more plugged into the tech startup ecosystem and the venture capital ecosystem that I was even on the founding board of a student-run venture fund at the University of Chicago. That was pretty foundational because I had never heard of venture capital before and while it was pretty small amounts of money we were working with; it was emulating a venture fund and I really enjoy that experience.
I said to myself, “This is a career option. I have to do this.” I was looking for that, leaving college. I didn't have a clear path into getting into venture capital. Spent a few years in the corporate world and some corporate strategy roles, both with Claire's Jewelry store and then with Walgreens on the e-commerce site. I appreciated those, but I was still itching to do something more entrepreneurial and more in the realm of venture capital.
In 2015, I was able to convince some friends and family to back me in M25's first fund. It was a whopping $1 million and there weren't any big press releases about that, but it did give me some amount of capital to start making angel investments. I went full-time on this and started to get us plugged into the communities as I can.
Our thesis was pretty similar, investing in the earliest stages of startups in the Midwest ecosystems. Back then, especially, it was pretty easy to get access to even some pretty quality deals as a relative nobody. And I just started hustling, building up fuel flow, trying to get our name out there, our reputation.
I met my partner, Mike Asem. He joined just before the launch of our second fund, which was in 2016. That was an $11 million fund to still the same strategy. You could write a little bit larger check now, but we're doing a lot of deals across the Midwest region, all in that earliest stage, and a pretty generalist strategy that has worked out pretty well.
We are now into our third fund. We closed it earlier this year, a $31.8 million fund three, giving us some ability to lead rounds, to be a little bit more impactful on the cap table. And that's where we're at right now. We've made 115 investments across the region, in about 24 cities and 11 states. It ranges from B2B software, consumer apps, e-commerce, healthcare, IT, transportation and logistics, software, FinTech, InsureTech, property tech.
So, we've done quite a bit pretty general, but trying to be some of that first capital here for founders across the Midwest region.
Gopi Rangan: Wow, what a journey. You peek through the curtains to see what venture capital was about quite early in your career and you found your way into this world. You started with a million-dollar fund, the number of million dollars sounds great, but for those of the people in the audience who are not familiar with venture capital, that's a tiny fund.
Victor Gutwein: Yeah, that doesn't even count almost as a venture fund.
Gopi Rangan: You started from there and now you've established a real machine that really fuels entrepreneurship in the Midwest. What is exciting for you when you work with entrepreneurs?
Victor Gutwein: Part of the reason that attracted me to venture capital early on was I am working with some of the most amazing people that you can work with. In the corporate world, there are some bright people, but there are also some people that are just getting by. No founder is just getting by. Everybody thinks that they have to be incredibly talented first of all, just to do this.
And then they have to think that they're going to change the world and have a huge outcome. They have to think that their vision for something that doesn't exist will be inevitable and that they will be the ones that can do it. And it's almost a little bit crazy, a little bit delusional sometimes, but at the same time, it's really inspiring.
I love working with these founders and I see a little bit of myself trying to start in 25 when I was relatively young and trying to get that off the ground. And I feel like there's a lot of just natural connection and shared vision that we can come together on. It's a huge passion of mine. I have found my career.
I am charging ahead with this and you know, that's something that just keeps me going, even though there are some ups and downs, of course, in every startup and venture capital journey.
Gopi Rangan: Yeah, you mentioned a very interesting point in large companies it's possible for someone to hide and not do a lot, just do the minimum to keep the job, collect the paycheck, do other things in life.
No founder, no startup entrepreneur can ever work like that, does ever work like that. They all give 110% and they lose their sleep. They make a lot of sacrifices to build their businesses. And it's an honor to have the opportunity to even sit down and talk to them and being a part of that journey is a huge opportunity for investors like us.
Victor Gutwein: Yeah. It has some good sides and bad sides sometimes to that, but regardless it's inspiring. It's something that I love working alongside.
Gopi Rangan: You invest primarily in the Midwest. Can you give a little more description of what you invest in, your region? You mentioned a few topics earlier, which are quite broad.
Can you give a little more color on the kind of startups you like to invest in?
Victor Gutwein: Yeah, of course. First just hammering in on why we invest in the Midwest and what that means to us. When I was first starting, it was to me, pretty clear that there was an opportunity in the earliest stages to invest in Midwest headquartered companies.
Because when you look at the capital sources available to a founder, it’s hard to find real risk-seeking capital for things that don't have hard assets. It's not farmland. It's not a manufacturing company. It's not real estate. And people around here, that's what they've made their money on, for the most part. They haven't made their money off of being an early investor in Facebook or Uber. The angel community, the early venture fund community, is much further behind here. Companies don't have that opportunity to tap into their network and raise that first million dollars.
That's changing a little bit as there are more and more success stories and as COVID has allowed founders to reach out and establish relationships, not just with people in their immediate region. But it's still going to be a struggle and it definitely was when we first started. We thought, hey, this is an opportunity because we are seeing great founders, we're seeing great companies with huge potential. They're not raising capital, they're not raising enough capital and we can be there and in a purely economic sense, just take advantage of that opportunity, and when to partner with entrepreneurs at that stage.
I also think that there are just some common opportunities across the region. That's a huge economy, it has huge amounts of industry, fortune 500 companies to sell to, or to pick talent from. It has started to have now some recycling of unicorn exits that have sold or have done really well and IPO, and are now starting to spit out talent that has seen what the inside of a tech company looks like.
To me, this is a really big opportunity that we planted our flag and we are going to be investing here. We're going to be covering the ground. We're going to be flying to Kansas City, to Minneapolis, to Grand Rapids, to Cincinnati, and we're going to be finding these opportunities and not making just one investment, but then using that flywheel to continue to invest in a company after company.
The types of company and the stage of a company can vary a little bit, but they're almost always less than a million in revenue. And on occasion, especially back in more of a seasoned team, we've invested pre-revenue or even pre-launch of the product. And people would call that maybe pre-seed up to maybe seed stage now.
The round size tends to look anywhere from a $500,000 total raise to a $3 million total raise we're investing anywhere now with our third fund, between $250,000 to $500,000, which can put us as a lead investor or maybe just a syndicate partner, depending on what the rounds shaping up to be. And for us, it's, that's where some of the best opportunity is. Once you get a little further along, we think that it's easier for an investor across the nation to come in and take a look at a company that has a couple of million dollars in traction and invest in that.
So, we think our competitive advantage is a little bit earlier on into these companies that tend to be software, e-commerce, digital marketplaces, things that have high potential can scale really quickly and don't need quite as much capital maybe as a deep tech or biopharma medical device type of investment.
So, yeah, that's the archetype of what we're looking for and what we've continued to back these past years.
Gopi Rangan: You're investing largely in a neglected sector, geography, the kind of companies that are not a lot of other venture capital firms focused on these areas. You're dominating that space because you're the best investor, very quickly. I want to get back to the topic of how it's different and what can we do to improve the ecosystem. But I want to first talk a little more about startups and the startups you have invested in. Let's pick one or two examples. I know you and I are both investors in Joshin, it's based in Minnesota. You could also pick other examples.
What do you ask founders when you first meet them? What happens in the first meeting?
Victor Gutwein: Yeah, there's a lot of typical questions that we're looking for. We want to know about the team's background and experience and why they may be the best fit for this company. We also want to know, which is a great example with Joshin, right Gopi.
We saw these founders had run a, more of a services, brick and mortar business targeting those with disabilities, children with disabilities. After they sold that, to make it into basically a digital marketplace in an app that was a little bit more asset-light, but then it could be a lot easier for that to grow across the U.S. and for people to have access to that. We're trying to find out why is this founder starting this business? What was the story that led to this? There's a lot of questions about the market. Why is this product for this market, who are your target customers? And then usually we're asking about how did you get your first customers?
What does that traction look like? But one thing that maybe is a little bit more unique of a discovery that we try to make within an early conversation is what is this founder shooting for? Because in the Midwest, we often suffer from founders that have something that could be really high potential, could be a billion-dollar-plus company, and their content to be more of a bootstrapped or aimed towards raising the first round of venture capital to aim for profitability and sell for a more modest outcome, which is not necessarily a bad thing at all.
And there's a lot of great outcomes that can be like that. But we are looking for, more of that, it's almost like that Silicon Valley growth mindset with Midwest roots. Sometimes we have to encourage that or enable that our founders to swing for the fences and not to do a little bit more conservative of a path.
I try to say it, let's not just make the front page of our local business journal newspaper. Let's try to make national headlines, the front page of the Wall Street Journal. Let's try to push the opening bell at NASDAQ or NYSE, let's think about those types of goals. And we've had founders, I would say that has been across that spectrum and I've seen the transformation sometimes when people maybe start off thinking that their businesses are, like hey, if we could sell this for $20 million, that would be great.
And then maybe through working with us, maybe through our conversation, they're starting to think bigger. They're starting to think of a bigger impact and we're excited to push on that and help those founders maybe shoot for those dreams. Yeah, that's maybe one of the unique questions that I'm looking for in my region because that conservative mindset may be less prevalent on the coasts.
Gopi Rangan: So, one of the striking facts for me is that a lot of industries in the real economy are in the Midwest, in the U.S. A lot of the tech companies build solutions and eventually start selling to customers in the Midwest. I wonder how entrepreneurs can prepare so that they can capture that market and not wait for coastal startups, mainly Silicon Valley startups to build those solutions and be ambitious about targeting customers. And they are in the Midwest right in your backyard.
Victor Gutwein: Yeah, well Gopi that's a prime example of what is an advantage out here. And that like a founder out here, they may not have the most access to capital. They may not have been working at Facebook or Google early on. I have a couple of examples in mind of founders that are coming out of the industry and just with a tech product and they can get to market a lot faster.
One of them is a healthcare software called Authentics. It sells to large payers, providers, and pharma companies. AbbVie as a customer. Anthem as a customer, that's another big one. These are the relationships that this founder, Amy, had, prior to leaving and starting Authentics. She was working inside a lot of these healthcare companies alongside them.
She had a consultancy at one point, and she knew exactly this pain point that they were facing. It has to do with customer data coming in and being able to actually make use of that and process that at scale, she built as a very successful so far. It's already advanced a lot and raised a strong series A. And that's a prime example of not coming from a Silicon Valley tech background, but coming from an industry background. We're recognizing that need, having a great founder market fit, and then starting an incredible growth company right out of the bat and having some big contracts with some industry leaders.
Another example would be a company called Movement. This founder worked for a couple of years at F, a rapidly growing trucking brokerage called Circle Logistics. He left that after seeing a need to make a part of his work significantly more automated. Saw that across lots of both these shippers and the agencies, the brokerages that needed to send out RFPs needed to do bidding processes much more automated.
He saw that need. And he was able to go to a lot of early customers as well. Once again, strong founder market fit, recognizing the need and going out there and building it, but not necessarily with a traditional Silicon Valley unicorn type background. That's maybe one of the biggest opportunities that this region has and we're really excited about seeing those stories progress.
Gopi Rangan: This is very interesting. We are talking about founders in the Midwest and I see that they have a natural advantage. Where most of the customers that they would want to sell to are an hour, two-hour driving distance away. And more importantly, because they've lived in that area, they probably had a lot of informal conversations about how these businesses are run, where the challenges are. It's a lot easier for the founders to empathize with customers much, much more easily possible than two kids in a garage in Palo Alto.
But yet, of the Midwest founders struggle. Why is that the case? What happens and what are some mistakes that they make?
Victor Gutwein: Yeah. Some of the common mistakes that we see, because we've seen all of the mistakes that you can make probably across our portfolio, but some of the common mistakes or just issues that they face would be we have historically lagged in being able to attract experienced talent that has been at a rapidly growing venture-backed startup before. We just don't have as much of that in the region. We've also lagged behind on being able to attract large amounts of venture capital as we see in the news in Silicon Valley or New York or LA, and both of those are a little bit more network issues.
I see some of my companies rapidly evolving to be able to have their headquarters and the main center of operations in Minneapolis or Cincinnati, but then taking on talent, remotely. Yeah, this many were doing this before the pandemic. Astronomer in Cincinnati had gone to our headquarters, that's where a lot of our leadership is, but we're hiring people across the U.S. and even some people across the world.
And they made themselves remote first to just solve that issue of not having access to all of the talents they would need just in Cincinnati. Another creative solution was a company of ours called Branch, they're based in Minnesota, in Minneapolis. And they were trying to find talent to come work in Minnesota.
And they were most successful by being creative and finding people that had grown up there and we're working then at Silicon Valley startups. But hang on to like on LinkedIn, their high school was in Bloomington or one of the Minnetonka or one of the suburbs up there and they were reaching back out, hey, do you want to come home? There's a great venture-back startup here to work for. And that was successful for them. And there are these issues, there are these mistakes that are common. They're trying to find some creative solutions for that. As far as raising capital goes, a lot of it sometimes is representing yourself too conservatively.
We have historically seen across our portfolio our companies don't pitch as aggressively. They're not talking about how they're going to be billion-dollar companies to VCs, and we spend a lot of time helping our companies think about that, how they're going to talk and show that story in their pitch deck.
I have companies that consistently exceed their forecast. Who exceeds hockey stick level forecast? Well, the problem is a lot of our founders aren't putting hockey sticks out there. They're putting like, “Oh, I know we're going to close these deals in this deal.” That's all they put. And I'm like a Chicago founder in the healthcare space. And he's like, “Yeah, we're revising our forecast upward.” I just get a simple email. I'm like, so you beat your forecast. You would never have put that on a pitch deck.
And I had to coach them. I'm like, look, we have to show what's possible with your company. People are investing in the future and they're investing in the vision. We're not going to put something that could never happen, but we want to put something that as a goal, a target.
Showcase that, showcase how we're going to get to that billion-dollar valuation in outcomes so people can see and believe. And yes, I know you haven't built this product yet, but that is part of your roadmap, that is part of your plan. And that will add ACV that will add additional customers we can target. That's how we're going to grow faster. That's the type of stuff and maybe common mistakes I see across our portfolio that once again, maybe those are a little bit more unique to Midwest founders than they are in Silicon Valley.
Gopi Rangan: Yeah, talent and capital. Both are challenges indeed. That talent is a problem for many, many startups because it's really hard to convince employees to leave a nice high-paying job and take a huge, risky opportunity at a startup. I can imagine why that can be extra challenging in the Midwest. That culture doesn't exist in the same way it does in other startup ecosystems.
Capital is a problem. I remember I was a speaker at a FinTech conference in Omaha, Nebraska a few years ago. And I was told that Omaha, Nebraska had the highest density of millionaires in the country. And yet they don't invest in startups. They are not angel investors. They're not investing in the pre-seed, seed stage where you have in your companies.
And even when they invest, they want to take a huge chunk of ownership and reduce their risk. That's not how venture capital works. I hope that we can change some of that, but what can founders do? What tips would you give to founders so that they can more easily attract talent and more easily attract capital and solve other problems? Make it more interesting for investors.
Victor Gutwein: Yeah, some of what founders should do early on, as they're trying to raise, maybe that first round of capital, you have to tell a story that's going to be unique and on the edge of unbelievable, but still, if you get the right person with the right thesis, they can imagine that vision with you.
But it is practicing storytelling, practicing pitches. I do tell founders to hitch and constantly refine, but maybe you start with more friendly investors, people that will give you some real feedback, but not sugarcoat it because a lot of times if it's an investor that you've never met before, they're going to be a little bit more gentle with their feedback or not give you any feedback because they don't want to come across as a negative relationship. Go to people that you have met before, that have indicated a willingness to hear you out, pitch, get feedback, refine that pitch.
And when you are raising, then you do need to talk to as many investors as you can, to get an audience and a sense of what the market is saying about your company, about their willingness to invest. Ultimately, you want to have multiple people discussing terms with you so that you can get a sense of what amount you can raise and the valuation.
A lot of times, once again, here in the Midwest, I feel like we just settle for the local investor that's willing to give us a shot, but those aren't always the best terms or that may not be the best investor for your business. I want founders to get a market of ideas and influence and opportunities to take on capital from a larger group of investors.
I do encourage that quite a bit. As far as what founders can do to attract talent. This is one of the biggest struggles now and especially if you don't need capital, you need talent and prices are going up. We've seen some of our teams having to pay, even if they're based in Columbus or they're based in Indianapolis, they have to pay salaries to their engineers because otherwise, our engineers can just work remotely for a company on the coast. What is going to be the reason they'll work for you, especially if you don't have the same type of capital behind you to hire them. I say that there has to be some positive culture, a reason to work there, but at the same time that you have to be constantly tapping your network. Especially as a CEO, eventually your job becomes just two things hiring and retaining talent and raising money, and keeping the business financed. That becomes basically your job as the CEO, thinking about that early is important.
Gopi Rangan: Yeah. I've always believed that entrepreneurs will do better if they are in their own home ground among their friends and family, instead of uprooting them, moving them to a different place, just to build a business.
I actively invest outside Silicon Valley and Midwest and other places as well. It's interesting to see that it's becoming more possible for entrepreneurs in Midwest and other places to have access to good investors and local investors. Like you are also building the ecosystem. It makes it possible for entrepreneurs to stay where they are.
And I really hope to see greater companies coming out of the Midwest. How do founders react when businesses don't work out the way they do, do you push them to be aggressive with their goals? And when they fail, what can you do to help them?
Victor Gutwein: Once again, coming from what I'm seeing here in the Midwest, I feel like typically we have founders that are fearful of failure and they stick around in a business that has very limited upside because they don't want to throw in the towel that we don't have a culture that recognizes that it's okay.
You have given your best and failed. A couple of examples are a company that at one point was really promising and had lots of users and growing revenue, but ultimately wasn't going to be able to compete. And it became clear, had done a down round, had really struggled. The founder still was working nights and weekends, Uber driving to pay for the one employee that they could retain to keep the business afloat while also racking up a lot of credit card debt on their personal credit cards. And it was a really painful thing to see because while I admired founders' grit, I just knew that if we had been in Silicon Valley, that founder would have gotten enough encouragement from other investors to say, it's okay to fail.
We can start a different one, we can work on something else. And we didn't have that. Another one in a smaller ecosystem that we've invested in is afraid to wrap the business up when it's pretty clear that it should be because that founder and that company had been a darling of this ecosystem that hadn't had a lot of tech companies come through and raise venture capital.
And for that company not to do so well would be a stain, a little bit on the ecosystem. And at least in this founder's mind, I think we can encourage it to be over that boundary, to work on something else, to not continue to defer salary and just the opportunity costs for that founder to do that, but there's a lot of loyalty to investors.
And if you take money, a lot of founders will be resistant to not doing everything they can possibly to return that money. Sometimes I think the detriment of themselves as an investor, we know we're going to lose money on some of our investments. That's a mindset that I see around recognizing failure when to call it. I try to be helpful and gentle in those moments, but I also think that sometimes there's just so much cultural pressure as well. That's not everybody, of course, sometimes we've had founders maybe throw in the towel too early. But in general, it's maybe something that I see within our ecosystem.
Gopi Rangan: Yeah. That fear of failure definitely hurts founders.
If we can get over that and use a failure as a badge of honor, which is very common in Silicon Valley, then that brings a huge change.
Victor Gutwein: It's also the issue is, if people are scared of recognizing a failure, it's going to cause people a lot more resistance to starting up a company. We're going to have less companies formed, less shots on goal for our ecosystems. A founder, instead of doing a failed company and then writing that off and then starting one that is successful, maybe bringing some of those same investors onboard instead were maybe languishing with spending twice as much time on a business that we should have maybe wrapped up by now. But that's the opportunity costs and we're aren't signing up to start a new business because they're worried about failure.
Gopi Rangan: This is a very useful point for entrepreneurs. When businesses face issues, smart entrepreneurs try to find a way to mitigate problems. If failure is a problem in the culture of that ecosystem, they begin to aggressively think about how to mitigate and try to preserve, instead of looking at the opportunity to double down and maybe grow even more aggressively, they just do not want to fail.
And that attitude brings a lot of conservative thinking. If we can change that, and if they take a more aggressive view, even when the environment is throwing challenges at you, if we can find a way to take advantage of opportunities, if it's going to throw challenges at you, it's probably going to throw challenges at many other businesses as well.
And what's the opportunity there, and that's the kind of thinking that will probably unlock a lot of potential for the business. It's a great way to think about aggressive growth. I want to switch to the next part of our conversation and ask you about community involvement. Is there a nonprofit organization you are passionate about? Which one?
Victor Gutwein: Yeah. One of the organizations I'm most passionate about is a group called Faith Tech, which is trying to get people that are Christians that have strong technical skills to be able to use and give back their time, their skills, and resources that they're most equipped with. Some of the things that they've done are they notice that there's a whole bunch of people every year, that search how to kill themselves online, which nobody should be searching. We don't want people to be exposed to that because they can build websites. They know SEO. They're like, hey, in our free time, we can build a website that becomes the first hit on Google that leads people to suicide prevention, resources, and a place that they can go and get help.
That was one of their projects that they did and utilizing their skills and resources and something that is helping. That's something that I'm passionate about and I give some of my time and efforts to.
Gopi Rangan: That's a noble service. Indeed. Thank you so much, Victor, for sharing insightful stories, authentic examples of how startups evolve in the Midwest, and the opportunities I had for all of us.
I look forward to sharing your nuggets of wisdom with the world.
Victor Gutwein: Thank you. Great to be on here.
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